08/02/2025
Job Gains Disappoint
Heading into the highly anticipated Employment report on Friday, mortgage rates were nearly unchanged from the prior week. The data on job gains was much weaker than expected, however, and rates ended the week lower.
The key Employment report revealed that the economy added just 73,000 jobs in June, a little below the consensus forecast of 100,000. The shocking news, however, was that downward revisions reduced the results for the two prior months by a massive 258,000 jobs. The rare signs of strength were seen primarily in the health care, retail, and social assistance sectors, while the federal government employment continued to decline.
The other major components of the Employment report contained no significant surprises. As expected, the unemployment rate increased from 4.1% to 4.2%, which is still reasonably low by historical standards. Average hourly earnings, an indicator of wage growth, were 3.9% higher than a year ago, up from an annual rate of 3.7% last month, which was the lowest level since the middle of 2021.
Fed officials keep a close eye on inflation, and the PCE price index is their favored indicator. In June, Core PCE was 2.8% higher than a year ago, the same annual rate of increase as last month and matching the consensus forecast. Progress toward the 2.0% target of the Fed has not been easy, and this desired level has not been achieved since February 2021. The big question remains how large an impact higher tariffs will have on future inflation levels.
The Fed meeting on Wednesday caused little reaction. As expected, the Fed made no change to the federal funds rate, leaving it at a range between 4.25% to 4.50% where it has been since December. The meeting statement was similar to the prior one, emphasizing the high degree of uncertainty about the economic outlook due to changes in government policies. After factoring in the weak labor market data, most investors now anticipate that there will be a 25 basis point rate cut at the next meeting in September and another one at the meeting in December.
Week Ahead
Looking ahead, investors will continue to look for additional information about tariffs and monitor comments from Fed officials for hints about monetary policy later in the year. It will be a light week for economic reports. The ISM national services sector index and the Trade Deficit will come out on Tuesday.
